Joint venture boosts Mineral Deposits

Mineral Deposits
is likely to end the week on a high note after the stock rallied to a six-week high on Friday morning following a recommendation upgrade from a broker in the wake of its joint venture deal that will create a new global major mineral sands producer.

The JV with ERAMET will see the European alloy and special metals producer fork over $US30 million ($29.2 million) and merge its titanium dioxide plant in Norway into the new entity, along with Mineral Deposits’ Grande Côte mineral sands project.

The plant is the only facility in Europe producing titanium dioxide and Grande Côte is 90 per cent owned by Mineral Deposits with 10 per cent retained by the Republic of Senegal.

Royal Bank of Scotland sees the JV agreement as a win-win for all parties involved and it believes that the merger of the plant and the project will significantly increase the value of the economics for the project.

The 14-year mine-life project is estimated to cost $US406 million with a production target of 85,000 tonnes a year of zircon, 575,000 tonnes a year of ilmenite and 17,000 tonnes a year of combined rutile and leucoxene.

While the strong outlook for mineral sands demand has been highlighted by Iluka Resources and reflected in its share price, Mineral Deposits’ share price has not fared quite as well as it tumbled to a 10-month low of $3.94 on August 22.

The ownership dilution of the Grande Côte project means that Mineral Deposits will not have the full exposure to pricing upside for zircon, but Goldman Sachs believes this is partly offset by the higher revenue the miner will receive through its ability to sell a premium slag product made at ERAMET’s plant, and it is urging investors to buy the stock.

The stock jumped 5.8 per cent to $5.15 this morning. RBS lifted its price target to $8 from $5.05 and Goldman Sachs has a 12-month target of $7.25 a share.

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Iron ore miner and steel-maker
OneSteel
is another that enjoyed a strong rally on Friday morning, although shareholders are unlikely to be too thrilled given that the stock had plummeted to a more than nine-year low of $1.26 on Thursday.

Fear that steel-makers are structurally challenged due to the carbon tax, rising costs and intense competition from cheaper offshore manufacturers has kept OneSteel in the sin-bin despite its best efforts to diversify into iron ore production.

UBS noted that the market was expecting companies like OneSteel to generate below average earnings before interest and tax (EBIT) margins and return on equity in the current financial year.

“It would appear the market is saying that the earnings power of these stocks has downshifted structurally, or perhaps the market is saying that the cyclical risks to 2011-12 sufficiently outweigh the longer-term mean reversion story," said the broker in a report released on Wednesday.

While buying OneSteel is a relatively risky proposition, the broker thinks that it offers one of the best overall risk-return trade-offs at current levels.

The punt could be worth taking as much of the bad news could be in the stock given that it is trading on a consensus forecast price-earnings multiple of just 5.5 times for 2011-12 and 4.2 times for 2012-13.

Further, OneSteel has one of the highest, if not the highest, forecast yields in the resources space. Brokers are expecting the stock to yield around 9 per cent and 12 per cent for this and the next financial year.

Almost all brokers polled on Bloomberg are urging investors to buy the stock with an average price target of $2.13 a share.